Tax Reform Efforts Show Momentum, If Nothing Else

House Speaker Paul Ryan

House Ways and Means Committee Chairman Paul Ryan is going to try. That’s the word on the street from tax analysts, lawmakers and congressional aides. At some point between now and Thanksgiving, we’ll know whether the Wisconsin Republican has succeeded in cobbling together enough support to rework the international tax code and keep highways and transit funded for four to five years.

It’s a tall order, but it’s also one that has the cautious support of most of the business community and a sizable chunk of Congress, Republicans and Democrats alike. The U.S.’s international tax rate, at roughly 35 percent, is cripplingly high compared to other countries, where it hovers around 25 percent. The discrepancy alone is killing U.S. companies, according to some business advocates.

“We’re losing competition out of the U.S.,” said Matt Miller, vice president for fiscal policy at the Business Roundtable. “We’ve lost to the tune of 1,300 companies.”

Miller, like most other business and policy executives, is probably tired of saying this. Statements like these have become a clarion call among tax analysts and fiscal experts. The international tax code must be fixed or U.S. businesses are going to suffer. Soon.

The problem lies in how this gets accomplished. Tax reform is notoriously difficult. Just look at three of the last four chairmen of the House Ways and Means Committee: Michigan Republican Dave Camp, New York Democrat Charles Rangel and California Republican Bill Thomas. All of them had big designs for major tax reform. All of their efforts were watched eagerly by the business and financial communities. Thomas had a small role in the 2001 Bush tax cuts that are now coming back to haunt lawmakers in the form of extenders. The other two got nothing.

Ryan thinks the next, long overdue tax steps might as well happen this year. GOP leaders appear to be giving him enough leeway to try. He has about three months to draft a bill and then show that it won’t get hung up in political fights. There will be lots of time-wasting distractions thrown in—a Sept. 30 deadline to fund the government, a visit from Pope Francis, etc.

Even so, it could still happen. Here is how a tax overhaul could play out, according to people both on and off Capitol Hill who are involved in the discussions.

The first step is already in play. Tax writers are leveraging the bipartisan push for a must-pass highway bill to attempt to fix the international tax code. It’s a clever marriage of convenience. The highway trust fund will be dry around mid-December. Its authority runs out at the end of October. Congress must act or states will halt every pothole-filling and bridge-repair plan on the books.

Some $2 trillion in assets from U.S. companies is sitting overseas. Taxing that money at even the lowest level, say in the 5 percent to 6 percent range, would bring in enough cash to keep the highway trust fund afloat well into the next administration. Taxing it higher, at 14 percent as President Obama has suggested, would pay for the kind of upgrades that could put the nation within spitting distance of world-class infrastructure.

On Capitol Hill, the tax and transportation agendas will proceed in tandem. The House Transportation and Infrastructure Committee is readying a highway policy bill to come to the floor this month, aides say. Whether that measure includes a tax package that would pay for its extended highway authority depends on the progress of the Ways and Means Committee.

Ideally, the tax and transportation pieces would go to the House floor together. But if tax writers are still mulling the details, the tax piece can come to the floor later. That’s likely what will happen, given that aides say the Ways and Means Committee is still crunching numbers with the Joint Committee on Taxation.

Assuming the tax package is more or less together by mid-October, Ryan will then need to convince GOP leaders and transportation committee heads that his proposal has enough momentum to pass both chambers and be signed into law by December, when the highway trust fund will be tapped.

If there is in fact the momentum to go forward, lawmakers will then need to pass yet another short-term extension of highway authority before Oct. 31. That will give them about six weeks, with Thanksgiving in the middle, to hammer out the final details of the tax package.

There is no room for error. The White House will need to be on board, as will Senate Majority Leader Mitch McConnell (R-Ky.). The two parties think very differently. McConnell has already expressed skepticism that a complex tax bill—even one that doesn’t pretend to be comprehensive—can be completed in such a short time. Like many prominent Republicans, he also dislikes the idea of raising money through taxes for something other than overall tax reform. The administration is in the opposite camp, seeking a big infrastructure payoff in exchange for signing off on a big corporate tax bill.

With so many hurdles, it’s a wonder members think they have any chance at all. But their optimism comes in part from the need for a highway bill, which can’t be ignored.

Passing a highway bill would be a no-brainer if it didn’t cost so much darn money. It costs roughly $90 billion just to keep highway funding at current levels for four or five years. And everyone in the transportation industry would be a lot happier if the measure actually went longer and offered even the slightest of increases. They are tired of lobbying every two years for highway authority that almost nobody disagrees with.

Transportation aides joke that they are happy to let tax reformers ride on their must-pass wave. The truth is that each side needs the other. But partnership isn’t without its complications. The tax world is notoriously complicated, with a lot of horse trading that is an anomaly to the transportation industry.

The biggest challenge will be curbing the scope of the tax piece. Analysts agree that if current investments are taxed at a one-time low rate to fund highways, the international tax rate needs to come down permanently. Otherwise the package does nothing to help businesses, who are the biggest lobbying force behind the change.

Lowering the international tax rate costs the government money, no matter how good it is for businesses and the country in the long run, because the United States effectively would be owed less than it was owed before. Lawmakers would have to make up for that loss.

One solution proposed by Reps. Charles Boustany (R-La.) and Richard Neal (D-Mass.) would wall off non-liquid assets—i.e., those that are invested in the U.S. economy—for substantial tax breaks, while continuing to tax liquid assets at current levels. That helps the government balance sheet, but it also makes what was once a tantalizing tax break a lot less attractive for some businesses. It could even put some companies in a worse position vis-a-vis their competition. Republicans and business analysts say it’s definitely a bad idea if it dampens a broader corporate tax reform.

Miller puts it this way. “On international-only reform, at the Business Roundtable we can’t prudently comment until we see specific details. …It’s critical that any incremental reforms not make it more difficult to achieve broader tax reform.”

That is a much more measured statement than the blunt and unison “Fix International Taxes Now” message that is more likely to compel members of Congress to act.

“You may need to re-evaluate the notion that the business community really, really wants this,” said one analyst. An up-front international tax without an overall  rate cut might not go over well in Congress or the lobbying community unless there is some assurance, somewhere down the line, that a bigger tax bite is coming.

But who’s to say that’s not what Ryan is planning?

Morning Consult